Yield Inversions


Thinks s/he gets paid by the post
Feb 24, 2009
Hi All, hoping to get some education from the many wise here.

Lots of talk about inversion of yields where shorter term are higher than long term. I understand why longer should be higher yields, more risk of unknown demands higher payback. I also understand why an inversion is a troublesome sign in that it points to higher rates and slower economy.

However, all the attention seems to be on 2yr/10yr spread. Yields this morning have 2yr at 2.5%, 5 year at 2.75% and 10yr at 2.7%. Earlier this week 2yr was above 10yr but no attention to the 5 year and relation to 2 or 10yr.

Anyone know why 2/10 is important but 2/5 doesn't receive attention ?

Seems to me that the market is saying the inflation will last between 5 and 10 years, with rates signaling expected inflation direction. Any thoughts on what the 3 rates are telling us ?
The 2/10 inversion is considered by some to be indicative of a recession within the next six months to two years. Recessions are typically preceded by a 2/10 inversion, but not all inversions lead to a recession.
It’s noise. Keep to your asset allocation and don’t try to time the markets.
Some favor the three month to 10 year comparison. Not sure all the logic but in general, I see no reason to get too concerned. Recessions come and go.
All the talking heads have predicted 48 of the last 2 recessions. Yes the inversion is *one* of the indicators, but it is not the only one and is certainly not 100% accurate predictability in itself.

I think the recent rise in short term is a reaction to the shorter term high inflation we have now more than anything. I am more worried about the inflation causing recession than the inversion. Long term rates will catch up and increase, especially as inflation is going at a higher rate than average for extended period.
So quick reply, I'm just trying to understand some of the data I see and perhaps spark a conversation that will reveal some ideas. I'm not trying to time the market or take any specific actions based on these data points.

I'm curious why the 5 year would be higher than both the 2 and 10 year. It would seem to me that the market is expecting inflation to be a mid-term, (somewhere around 5 year) problem. Seems that is a good reason for the 5 year to be higher if you expected inflation get worse then revert to +-2% around 5 years from now.
Some favor the three month to 10 year comparison. Not sure all the logic but in general, I see no reason to get too concerned. Recessions come and go.

+1. I have full confidence the economy can survive any recession and a mild recession is not necessarily bad, especially for retirees. A deep lingering recession could be painful, especially for young families and workers.
Recessions historically also follow "oil shocks"...like the one we're experiencing now.

Most opinions I've seen say not until 2023, though.

I'm still waiting to see if 2022's war in Ukraine will lead to global thermonuclear war...
Can't have a recession with unemployment @ 3.8%. Can have a yield inversion and not have a recession.
The Fed uses the 3 month/10 year spread as a recession indicator, it seems the financial analysts and talking heads on TV like the 2 year/10 year spread. There are all different durations of bonds to compare so I don't know which if any really tell you what is happening or going to happen. If the Fed uses the 3 month/10 year then maybe that is the most important one since the Fed rises and lowers the over night rate?
Well no need to worry, inversion is gone for now. 5 year back in proper place between 2 and 10 yields.
Now wondering what that will mean ? No more inflation concerns or inflation expected to last 10 years ?
Just got IBond at 7% so I’m good
Clearly, a recession is coming. I just don't know when. I've weathered a bunch of them now. I didn't know what to do during the last several and I'm sure my crystal ball is no clearer now. What I HAVE learned is to stick with my plan (AA) but YMMV.
Bank lending profitability is usually more a 30 or 90 day thing. 2-3 year is where are a lot of shorter/intermediate duration bonds are whereas 10 year is the most common long duration bond out there.

IMO - 2/10 comparison would be more of a sign for corporate, mortgage and government bonds and the overall economy (what I would call a general recession), 30/90 day higher than the 10 year would be more of a sign of stress in the banking system (bigger issue).

I think the chance of a recession occurring in the next 12 months is rising. The data out of England yesterday showed a big drop in retail sales, which if a start of a trend will really put the Bank of England in quite the pickle, unable to raise rates without risking a big recession but leave inflation high or go headfirst into a recession and (hopefully) get inflation under control. The Fed Res here could be facing a similar dilemma at some point this year.

I haven't changed my asset allocation (~50% RRE, ~37% stocks, 10% bonds, 3% other) this year except the natural ebbs and flows of valuation. I've finished buying my last property likely for a while a couple weeks ago...probably will start to build a cash pile here and see if we get a bigger pullback in stocks or bonds....at 19x forward earnings, stocks still aren't cheap. 2-3 year bonds are looking more interesting but still not enough to entice me to buy a lot. 10 year would need be closer to 5% to get me interested in a big way (~1-2% real rate of return).
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